REDUCE VAT ON ON-TRADE ALCOHOL - Drinks Ireland
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
REDUCE VAT ON
ON-TRADE ALCOHOL
Support the recovery of thousands of enterprises and tens
of thousands of jobs in Ireland by temporarily applying the
hospitality rate of VAT to the on-trade serving of alcohol
Commissioned by
The Licensed Vintners Association (LVA), Vintners Federation of Ireland (VFI)
and Ibec representative group Drinks Ireland
Authored by
Anthony Foley - DCU Economist
CONTENT
Introduction p1
Executive summary p2
1. Temporarily reduce hospitality VAT rate and extend it p3
to apply to sales of alcohol in the on-trade
2. The alcohol tax wedge: a big burden p4
on the on-licensed sector
3. Covid-19 aggregate demand and aggregate p5
supply impact and policy measures
4. The EU VAT directives: Government has freedom to move p6
5. The on-licensed sector in the immediate p7
post-lockdown situation
6. Why support the pubs and other on-licensed sectors? p9
7. Ireland has a high reliance on tourism employment p11
by international standards
8. Thousands of enterprises in drinks-related activities p12
9. Small enterprises dominate the drinks and p13
hospitality sector
10. Cost of the reduced VAT rate from August to December p14
INTRODUCTION
While Covid-19 has had an enormous effect on every part of the Irish economy, the drinks
and hospitality sector has been uniquely affected. Drinks and hospitality businesses were
among the first to close; many will be among the last to reopen on 20 July.
The vast majority of drinks and hospitality businesses in Ireland are small, family-owned businesses.
They have been closed for almost four months, many will be closed for longer. As they prepare to
reopen, the costs are significant. The combined cost of social distancing regulations, new overheads
(like PPE and Perspex screens), reduced capacity with time-limited customer visits, together with
already high consumption taxes like VAT and excise will make reopening these businesses in the
present market commercially very challenging.
The current outlook is grave. Even if pubs regain half their usual capacity by year’s end, which is an
optimistic scenario, as many as 22,500 jobs could be permanently lost, not to mention countless
more in supporting trades like catering, security, and entertainment.
It is a fallacy to presume that businesses that do close as a result of the Covid-19 recession will simply
reopen in a different form next year. The impact of mass closures will be long lasting, especially in
regional parts of the country. Indeed, the impact of this is more than economic; it is socially and
culturally significant. The loss of a pub is the loss of a community centre. This has been very evident
and apparent over the course of the past four months – pubs closed and local communities lost a
part of their culture, heritage and their social hub, not to mention the loss to their local economy.
Faced with such a large-scale crisis, the Licensed Vintners Association, Vintners Federation of
Ireland, and the Ibec representative group Drinks Ireland is calling for a temporary reduction in
the hospitality VAT rate and extending it to apply to sales of alcohol in the on-trade (pubs and
bars) until 31 December 2020.
Crucially, the new Government has the power to do this. European Commission directive (2009/47/
EC) makes it possible for a member state to apply a lower VAT rate on on-trade alcohol with immediate
effect, a fact unknown to many of Ireland’s government decision-makers.
In Spain and Italy, VAT on on-trade alcohol has long been set at the hospitality rate. In
Cyprus, in response to Covid 19, the VAT rate on services has been reduced from 9% to 5%
from June to January 2021, which includes alcohol sold in the on-trade. Similar measures are
being considered in the UK.
A VAT reduction would substantially increase the business confidence of Ireland’s publicans and bar
owners. It would improve the current difficult business model by providing a much-needed cash float
and lead to long-term survival rates, including the continued employment of existing staff without
the need to pay Covid-19 benefits.
We look forward to discussing this proposal in detail with our new Government this week.
Donall O’Keeffe Padraig Cribben Patricia Callan
CEO Chief Executive Director
Licensed Vintners Association Vintners Federation of Ireland Drinks Ireland
#NEWGOVPROTECTOURPUBS | 1
EXECUTIVE SUMMARY
We propose a temporary reduction in the hospitality VAT rate to 9%; and
extending it to apply to alcohol sales in the on-trade (pubs and bars), until 31
December 2020.
This is a temporary measure for the August to December period to support the
short-term severe business circumstances and constraints of the on-licensed sector
related primarily to Covid-19 and, to a lesser extent, the recession.
Reduced VAT rates have been used, and are being used, extensively in Ireland and in
the EU to support specific employment-intensive sectors such as hospitality.
EU legislation allows a reduced rate of VAT for on-licensed alcohol.
Some EU members have made use of a reduced VAT rate for on-licence consumption
including Italy, Spain and Cyprus - to support businesses in these significant tourism
economies.
This recommendation is made as a supply-side measure. It is intended to help the
public house business model, which has been severely damaged by the Covid-19
related physical distancing and cost increasing requirements. The “old viable
business model” is not currently possible. In effect, the revenue generating capacity
of a physical space has been dramatically reduced.
The cost of the temporary VAT reduction to 9% for on-licence serving of alcohol
until end 2020 will be €143 million on the assumption of the on-licence market for
August to December reaching 50% of its “usual” level.
The expectation is that the lower VAT rate will substantially increase the business
confidence of publicans, generate much higher survival and revival rates, and
enable an improved business model that will drive the sector to increase supply
capacity and thereby win back more of the “lost” market.
Why should policymakers care about pubs? After all, alcohol can be sourced from
supermarkets and independent off-licences. There are many economic and
social reasons:
› Public houses and other bars generate almost 50,000 jobs.
› Public houses and other on-licensed enterprises are very employment intensive compared to
off-licence retailers of alcohol.
› It is a flexible labour market that serves a variety of different employment demands.
› Pubs generate much more VAT revenue than off-licences from the same amount of alcohol.
While excise receipts are the same between on and off-licences, a unit of alcohol sold in a pub
generates more VAT than the same one sold in an off-licence because of the higher (service-
related) price in pubs. A weak pub sector costs the Exchequer money.
› The low-priced alcohol available in multiple off-licences is not a feature of pubs and other bars.
› Pubs help social interaction and provide a place to meet.
› Pubs support the international and domestic tourism product by both the widespread physical
infrastructure and their hospitality.
› Pubs support music and entertainment.
› Pubs support domestically produced alcohol, such as beer, to a greater extent than off-licences.
› Consumption of alcohol in pubs takes place in a more managed and controlled environment
#NEWGOVPROTECTOURPUBS | 2
1 Temporarily reduce hospitality VAT rate and extend
it to apply to sales of alcohol in the on-trade
The Licensed Vintners Association, the Vintners
Federation of Ireland and Ibec representative group
Drinks Ireland have convened as a group to call
on Government to immediately apply a reduced
hospitality VAT rate of 9% to alcohol served in on-
licensed premises as permitted in EU VAT regulations.
This lower rate should apply until the end of 2020. This
will support the survival of on-licensed businesses
such as public houses, licensed restaurants, and
licensed hotels. It can save thousands of small
enterprises and tens of thousands of jobs and
can promote the eventual reclaiming of the
sector’s substantial economic, regional and
employment contributions. REDUCE
The sector is being hit from all sides. This
proposal is necessary to support the much-
VAT
weakened commercial model of drinks
enterprises, a result of Covid, and to ameliorate
the severe shock to the supply side of the
sector. It is relatively easily implemented with
9%
minimum administrative requirements. to
#NEWGOVPROTECTOURPUBS | 3
2 The alcohol tax wedge:
a big burden on the on-licensed sector
The on-licensed sector is primarily a small-enterprise sector; despite this, the tax
wedge on on-licensed alcohol sales revenue is very large. A substantial portion of
the revenues received by alcohol on-retailers from customers is diverted to the
Exchequer through excise and VAT. While VAT is borne by almost all sectors of the
economy, very few activities have the additional indirect tax of excise.
Personal expenditure on on-licence alcohol was €5.677 billion in 2019. Of
this, €1.604 billion, or 28%, is expenditure tax. Excise is €0.555 billion, and
VAT is €1.049 billion. Over one quarter of the alcohol revenues generated by
the on-licensed sector, including public houses, licensed restaurants, and hotels,
from customers, is taken by Government and diverted from customers, staff,
entrepreneurs and investment.
This, of course, excludes income tax, USC, employer and employee PRSI, profits tax,
and other state-determined fees such as licences and commercial rates. This very
large tax burden is not justifiable in the emergency national and sectoral economic
situation caused by Covid-19.
All enterprises must adjust to the new reality, and the Exchequer should adjust its
tax expectations accordingly.
The Irish on-licensed alcohol tax burden
should be seen in the context of the current Expenditure Tax
Excise
€1.604bn
very high levels of Irish alcohol excise €0.555bn
compared to other EU economies. Ireland has
the highest wine excise of the EU27 and UK.
Ireland has the second-highest beer excise
and the third-highest spirits excise.
On the composite indicator (unweighted
average of the three individual rates for wine,
spirits, and beer), Ireland has the second-
highest average aggregate alcohol excise
of the 27 EU members and UK, behind only
Finland. Only eleven of 28 European have
a composite rate of more than €1,000 per
hectolitres of pure alcohol (HLPA). Only four VAT
€1.049bn
countries have a composite rate of more than
€2,000 per HLPA and only three, including
Ireland, have a rate of more than €3,000. 2019 PERSONAL EXPENDITURE
ON ON-LICENCE ALCOHOL
Seven countries have a composite rate of
lower than €500.
#NEWGOVPROTECTOURPUBS | 4
3 Covid-19 aggregate demand and aggregate
supply impact and policy measures
Economic performance is determined by both supply and demand factors. Most
discussion on stimulating the economy in the post-lockdown period has been on
aggregate demand. The usual dominant issue in a recession is a lack of aggregate
demand. The aggregate supply capacity may be sufficient to employ the workforce
but concerns about inadequate demand results in a failure to utilise the capacity.
The appropriate macroeconomic policy response is to stimulate aggregate demand
by various fiscal (lower taxes and increased public expenditure) and monetary
policy measures. If aggregate supply (or a specific sectoral supply) cannot respond
to the increase in aggregate demand, because of public health-related capacity
constraints, there is no point in stimulating the economy (or the sector) through
boosting aggregate demand.
The capacity of significant elements in the drinks and hospitality sector is undoubtedly
constrained relative to the pre-Covid position because of public health measures
and social distancing requirements. Consequently, it could be argued that there is
little point in introducing measures to stimulate the sector through higher demand.
Historically, lower expenditure taxes such as VAT would be expected to lead to lower
prices and would therefore stimulate demand. However, that is not the justification
for the proposed lower VAT rate. Instead, the proposed reduction is to support the
significantly worsened business and more costly model in the on-licensed sector. It
is intended to work on the supply side of sectoral economic activity and to increase
the possibility of trading commercially in the present terrible conditions.
The Covid-19-related social distancing and other regulations have caused a shift
to the left in the short-run aggregate and sectoral supply curves. Social distancing
significantly reduces the capacity of premises relative to the pre-Covid position
even if there were no demand constraints. Enterprises must also finance increased
virus-related operating costs. There has been a substantial negative impact on
sectoral and aggregate supply due to the virus-related regulatory changes. This
problem is not unique to the drinks and hospitality sector but the impact on this
sector is relatively large.
The proposed VAT reductions would be a substantial cost reduction for drinks
enterprises and would improve their supply position. This will assist the sector to
operate in the survival and initial recovery phase and to start to re-establish its
substantial pre-Covid economic contribution.
#NEWGOVPROTECTOURPUBS | 5
4 The EU VAT directives:
Government has freedom to move
Regarding reduced rates of value added tax, the relevant EU directive 2009/47/EC
of 5 May 2009, amending directive 2006/112/EC, states:
With respect to the supply of alcoholic and/
or non-alcoholic beverages in the framework
of restaurant and catering services, it may be
justified to provide a different treatment of
those beverages from the treatment provided
for in the framework of the supply of foodstuffs;
it is appropriate to provide explicitly that a
Member State may include or exclude the supply
of alcoholic and/or non-alcoholic beverages
when applying a reduced rate to the supply of
restaurant and catering services referred to in
Annex III of Directive 2006/112/EC.
Reduced rates of VAT for hospitality activities and other labour-intensive activities
are long-established policy instruments in both Ireland and internationally to
support economic activity. Never has the state faced such a massive sudden
economic collapse with, as of end June, almost a million people on unemployment
payments or wage subsidies.
The Government should grasp the opportunity to support the on-licensed
sector efficiently and effectively by lowering the VAT on on-licensed serving of
alcohol. Some EU members have made use of a reduced VAT rate for on-licence
consumption including Italy, Spain and Cyprus.
#NEWGOVPROTECTOURPUBS | 6
5 The on-licensed sector in the immediate
post-lockdown situation
Public houses and other bars and on-licences have been closed from March. A
very small number of pubs have operated various forms of off-licence sales on a
small scale. Off-licences have been open for business throughout the period and
have enjoyed substantially increased sales. Manufacturers and distributors have
continued to operate throughout the full period.
The overall alcohol market during the lockdown is characterised by no on-licence
sales and greatly increased off-licence sales. The net overall market will probably
decline during the lockdown. The great majority of enterprises have had to, or will
have to, introduce cost increasing and capacity reducing Covid-related measures.
Public houses and other bars and restaurants are particularly affected by capacity
reducing public health measures.
A recent LVA/VFI report outlined the stark impact on capacity of operating under
the current HSE social distancing guidelines. The report indicates that when the
HSE social distancing guidelines are applied in any 100m² area in an on-licensed
premises, standing capacity will diminish to 12.5%, while seating capacity is reduced
to 34% of pre-crisis levels.
This has a substantial negative effect on revenue generation and raises questions
of viability for very many licensed premises when operation is allowed. Even if there
is sufficient demand at current prices to fill this reduced capacity, commercial
operation may not be justified.
It is primarily for this reason that the LVA, VFI and Drinks Ireland proposes the radical
step of a reduced VAT rate on on-trade alcohol to improve the post-Covid commercial
model. The bar sector (pubs and other bars) of the drinks and hospitality sector
directly employed almost 50,000 persons with thousands more employed providing
inputs such as catering, cleaning, music, and security. The greatly worsened post-
Covid commercial model puts these thousands of jobs and enterprises at permanent
risk.
Less demanding health requirements would have a lower, but still substantial
negative impact on capacity. Under the WHO provisions, standing capacity would
drop from 200 people to 100 (50%), while seated capacity in pubs and bar/
restaurants would decrease from 100 to 65 (65%). Failte Ireland research has also
identified the constraints of the post-Covid operating regulations.
#NEWGOVPROTECTOURPUBS | 7#NEWGOVPROTECTOURPUBS | 8
6 Why support the pubs and other on-licensed
sectors?
Why should public houses be supported? If people do not drink in pubs and other
off-licences, they will buy in off-licences and drink at home. The Government will
collect the same excise revenue.
However, there are still very solid economic and social reasons to support public houses
and to work to avoid the closure of many:
Public houses and other bars Public houses and other It is a flexible labour market
generate almost 50,000 jobs. on-licensed enterprises are very that serves a variety of different
employment intensive compared employment demands.
to off-licence retailers of alcohol.
Pubs generate much more VAT revenue than off-licences from the same
amount of alcohol. While excise receipts are the same between on and off-
licences, a unit of alcohol sold in a pub generates more VAT than the same one
sold in an off-licence because of the higher (service-related) price in pubs. A
weak pub sector costs the Exchequer money.
The low-priced alcohol Pubs help social interaction and Pubs support the international and
available in multiple off-licences provide a place to meet. domestic tourism product by both
is not a feature of pubs and the widespread physical infrastructure
other bars. and their hospitality.
Pubs support music. Pubs support domestically Consumption of alcohol in pubs
produced alcohol, such as beer, to takes place in a more managed
a greater extent than off-licences. environment.
#NEWGOVPROTECTOURPUBS | 9The economy-wide and on-licensed-related levels of consumer
demand will be lower after lockdown due to the higher level of
unemployment and reduced earnings. It will be probably 2023
before we reach pre-Covid labour market conditions again. Most
bars will reopen on the reduced physical capacities and on-licence
sales will increase.
In terms of employment impact and VAT sales revenue, the larger
the on-licence resumption the better. The improved commercial
model caused by the lower VAT rate will support the survival of
pubs as they eventually move back towards pre-Covid operating
criteria as the health restrictions are relaxed over time.
The alternative is many bars will never open again, and the
pre-Covid employment and economic contributions will not
be regained. Of course, if effective treatment is found and
consumer confidence returns to pre-Covid levels, the business
sector will be able to operate at previous capacity levels but
will still have to cope with the weaker macro economy and
lower level of consumer demand.
The government report Economic Considerations for
Reinstating Economic Activity (2020) concluded that
the accommodation and food sector (including pubs
and restaurants) had a high vulnerability to permanent
damage or output loss. It reported: “Many businesses The alternative
[in this sector] will not be able to operate effective social
distancing and therefore will be unviable and remain
is many bars will
closed”. We must attempt to ensure that enterprises and never open again,
jobs are not permanently lost and that they will resume.
and the pre-Covid
We must also avoid the expectation that if many pubs fail
to survive the next few months other entrepreneurs and
employment
investors will seamlessly enter the industry and replace and economic
those that closed without fuss or delay. That will not be the
case. Many will not be replaced. Some replacements will contributions will
take a long time. A large sectoral skill and expertise, as well
as entrepreneurial resource, will be lost, and the tourism
not be regained.
product as well as social life will be negatively affected.
The difference between “no bars” and resumption of pre-
Covid position is approximately 45,000 direct jobs when
allowance is made for off-licence jobs lost to the increasing
on-licence sector. Even if the on-licensed sector regained
half its previous annual position, the permanent negative
job impact is about 22,500.
#NEWGOVPROTECTOURPUBS | 10* Eurostat Statistics Explained, ‘Tourism industries-employment’, 2019.
7 Ireland has a high reliance on tourism
employment by international standards
Ireland has a high reliance on tourism employment Greece (23.9%)
compared to other EU countries. Hospitality enterprises
such as public houses, bars, and restaurants are a core Cyprus (20.3%)
element of the Irish tourism product.
Malta (15.3%)
Measured as share of employment in the non-financial
business sector in 2016, Ireland’s tourism sector Ireland (13.3%)
share of 13.3% was fourth highest in the EU after
Greece (23.9%), Cyprus (20.3%), and Malta (15.3%). Spain (12.3%)
Spain’s tourism share of employment was 12.3% and
Portugal’s was 11.3%. The UK share was 11.6%. The Portugal (11.3%)
EU average share was 9.4%.
UK (11.6%)
8 Thousands of enterprises in drinks-related
activities
There are thousands of enterprises involved in the on-licensed drinks industry.
These include public houses and other bars, off-licences, manufacturers,
wholesalers, importers, licensed restaurants, and visitor centres. These then
support manufacturers and distributors.
The Revenue Commissioners’ alcohol licence data illustrates the large number of
enterprises in the sector. An enterprise may have more than one licence.
As of 2018 there were:
93 45 17 27
brewing licences distilling licences cider rectifier and
manufacturing compounding
licences licences
964 8142 2329 476
dealer licences publican wine on licences special
and other (restaurants) restaurant
bar licences licences
#NEWGOVPROTECTOURPUBS | 11#NEWGOVPROTECTOURPUBS | 12
9 Small enterprises dominate the
drinks and hospitality sector
Of 19,205 enterprises in the hospitality (pubs, hotels, restaurants) sector 79.8% or
15,328 employ less than 10 persons. Only 44 enterprises employ 250 persons or
more. 96.5% of hospitality enterprises employ less than 50 persons. The sector is
dominated by small enterprises. This raises difficulties for the sector in surviving
the effects of the lockdown.
The number and percentage of pubs and bars in each of the six licence net turnover
bands published by Revenue are shown below. The data include both public houses
and certain other bars. The very notable features are the small number with high
levels of sales and the very large number with low levels of sales.
8.6% of pubs have average annual sales of €952.5k or higher. On the other hand,
49.5% of pubs or 3,923 enterprises, have annual sales of under €190.5k.
Pubs and bars in each turnover band for licensing 2018 (net sales)
Turnover band €k Number of licences % of licences
Under 190,500 3,923 49.5
190,500-380,999 1,862 23.5
381,000-634,999 881 11.1
635,000-952,499 499 6.3
952,500-1,269,999 291 3.7
1,270,000 or more 466 5.9
Total 7,922 100
Source: Revenue/Parliamentary question
#NEWGOVPROTECTOURPUBS | 1310 Cost of the reduced VAT rate
from August to December
There are major uncertainties about the path of the economy over the rest of the
year, but there is reasonable certainty that the pubs and restaurants will face a very
difficult time due to the space constraints and other virus-related issues, as well as
the impact of the economic recession.
However, it is still feasible to identify the cost of the VAT proposal. We are asking
for the 9% VAT rate to be applied for the period August to December. This is
a temporary but significant support, and hopefully we will be more clearly moving
forward by the start of 2021.
Based on CSO data the 2019 on-licence alcohol sales were about €5.722 billion
including VAT. Of this, about 53% would have arisen in the second half of 2019. On
a proportionate basis, the August to December period would have generated sales
of about €2.527 billion in a normal period.
Our most optimistic market expectations for the second half of 2020 are that on-
licence alcohol sales will be at most 50% of what is usual. This would give an on-
licensed sales level of €1.264 billion. This is divided between VAT at 23% of €236
million and ex-VAT sales of €1.028 billion (it is assumed that VAT relates to 100% of
sales). VAT at 9% on the €1.028 billion would be €93 million. Without anything else
changing, the cost of reducing the likely second half 2020 on-licence alcohol sales
to 9% VAT from 23% VAT is €143 million.
If the on-licensed sector’s performance is lower than the 50% market expectation,
a smaller total value of sales will be charged at the lower 9% rate instead of the 23%
VAT rate. This will have indicated the even weaker nature of the sector, the threat to
enterprises and jobs, and the strong need for the policy measure.
If the sector performs better than the 50%, the increased sales will drive up VAT
revenue. Even if sales are diverted from the off to the on-sector of the alcohol
market, the Exchequer will win as the average unit of alcohol priced at €10 in the
off licence will generate VAT of €1.87 at 23%, while the same product in a pub will
sell for €36.59 on average and generate VAT receipts of €3.02 at 9%. The large
employment contribution of the on-licensed sector will also be supported and
enhanced by the measure.
The cost of €143 million will be partly offset by the economic and Exchequer returns
that flow from a stronger, as opposed to a weaker, public house sector. These include
VAT receipts, employment, reduced unemployment payments, increased income tax
and PRSI receipts, regional activity, social strengthening, and tourism support.
#NEWGOVPROTECTOURPUBS | 14Commissioned by
The Licensed Vintners Association (LVA), Vintners Federation of Ireland (VFI)
and Ibec representative group Drinks Ireland
Authored by
Anthony Foley - DCU Economist
#NEWGOVPROTECTOURPUBS | 15You can also read
